A Day in the Life of a JOA – Selected Daily Operational Issues By: Nicholas P. Laurent MCGINNIS, LOCHRIDGE & KILGORE, L.L
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A Day in the Life of a JOA – Selected Daily Operational Issues1 By: Nicholas P. Laurent MCGINNIS, LOCHRIDGE & KILGORE, L.L.P. 600 Congress Ave., Suite 2100 Austin, Texas 78701 (512) 495-6081/(512) 505-6381(fax) [email protected] South Texas College of Law 2011 Energy Law Institute September 1, 2011 1 The author wishes to thank Greg Mathews, Senior Counsel, Negotiations and Legal, Chevron North America Exploration and Production Company, for his thoughts and assistance in preparing this paper. All errors and omissions are the responsibility of the author. TABLE OF CONTENTS A. Basic JOA functions ................................................................................................................1 B. History of the JOA ...................................................................................................................1 C. Important JOA provisions ........................................................................................................1 D. JOA issues ................................................................................................................................2 1. Other operations clause .....................................................................................................2 a. Paint Rock Operating, LLC v. Chisholm Exploration, Inc., 339 S.W.3d 771 (Tex. App.—Eastland 2011, no pet.) – operator breaches the JOA if it doesn’t provide an AFE before issuing a JIB .............................................................4 b. Cone v. Fagadau Energy Corp., 68 S.W.3d 147 (Tex. App.—Eastland 2001, pet. denied) – non-operator’s refusal to consent to an “other operation” does not preclude the operation, but prohibits the operator from charging the non-operators for those expenses .....................................................4 i. Cone’s criticism of Texstar North America v. Ladd Petroleum ..................5 c. LPCX Corp. v. Red Eagle Oil Co., 818 P.2d 431 (Okla. 1991) – operator liable for cost of work and attorneys’ fees when it performed “other operations” without an AFE but billed the expense to the non-operators .....................6 d. Recommendation for operators .....................................................................................6 2. Liability of non-operator to third parties ...........................................................................6 a. Tawes v. Barnes, 340 S.W.3d 419 (Tex. 2011) – mineral lessor is not a third-party beneficiary of the JOA .................................................................................7 b. Lavy v. Pitts, 29 S.W.3d 353 (Tex. App.—Eastland 2000, pet. den.) – non-operators not liable for pumper’s personal injuries because non- operator did not exercise control over the operations or give any instructions.....................................................................................................................9 c. Berchelmann v. The Western Company, 363 S.W.2d 875 (Tex. App.—El Paso 1962, writ ref’d n.r.e.) – non-operators not held liable to suppliers hired by the operator when the operator failed to pay ...................................................9 d. Non-operator considerations........................................................................................10 3. The JOA operator is held to the “reasonably prudent operator” standard ......................10 a. Gross negligence..........................................................................................................10 P-ii b. Willful misconduct ......................................................................................................11 c. Operator standards under prior AAPL JOAs ...............................................................11 d. What is a reasonably prudent operator? ......................................................................11 e. IP Petroleum Co., Inc. v. Wevanco Energy, L.L.C., 116 S.W.3d 888 (Tex. App.—Houston [1st Dist.] 2003, pet. denied) – even if the jury finds the operator acted with gross negligence or with willful misconduct, if the evidence does not support such a finding, the operator cannot be found to have violated the JOA..................................................................................................12 f. COPAS issues ..............................................................................................................12 i. Operator must timely send JIBs, but if the non-operator fails to timely object, the non-operator may still be liable for the charge .........................................................................................................13 ii. Paint Rock Operating, LLC v. Chisholm Exploration, Inc. 339 S.W.3d 771 (Tex. App.—Eastland 2011, no pet.) – non- operator fulfills JIB objection requirement without explaining why it objects to JIBs ................................................................................14 4. Non-consent penalty provisions ......................................................................................15 a. XTO Energy Inc. v. Smith Prod. Inc., 282 S.W.3d 672, n. 2 (Tex. App.— Houston [14th Dist.] 2009, no pet.) – a non-operator cannot change its election to avoid potential non-consent penalties even if thirty days from the date of the notice have not gone by .......................................................................15 b. Valence Operating Co. v. Dorsett, 164 S.W.3d 656 (Tex. 2005) – the operator can commence subsequent operations before the expiration of the notice/participation election period .......................................................................16 5. Removal or resignation of the operator ...........................................................................17 a. Resignation/deemed resignation ..................................................................................17 b. Removal .......................................................................................................................17 c. Injunction to remove an operator .................................................................................18 E. Conclusion .............................................................................................................................19 P-iii A. Basic JOA functions courts have routinely recognized that competent parties can contract for whatever Joint operating agreements (“JOA”) have they want, with some limited exceptions.6 been described by the Supreme Court of Texas as “contract[s] typical to the oil and B. History of the JOA gas industry whose function is to designate an ‘operator, describe the scope of the The most widely recognized JOA is the operator’s authority, provide for the FORM 610 JOA published by the American allocation of costs and production among the Association of Professional Landmen parties to the agreement, and provide for (“AAPL”). That form has been modified in recourse among the parties if one or more relatively substantial ways four times in its default in their obligations.’”2 The JOA 50+ year history. provides a mechanism to join together several mineral lessors, landowners, The first AAPL JOA was published in 1956. working interest owners, other investors In 1967, the original JOA form was revised, and/or operators to agree on how joint and the AAPL JOA underwent substantive exploration and production operations will revisions again in 1977, 1982, and 1989. be conducted. JOAs “govern operations Many oil and gas companies, investors, involving great financial risk.”3 At its most operators, and non-operators use the entire basic level, the JOA fulfills three basic form AAPL JOA, others make changes from functions among interested parties: (1) the Form 610 and in some instances, oil exploration; (2) drilling; and (3) production. companies utilize their own form JOA. Other form JOAs have been published, but The standard JOA typically contemplates are not used nearly as much as the AAPL two parties, or two groups of parties: (1) the Form 610 JOAs in the non-Rocky Mountain operator; and the (2) non-operators. While region.7 a JOA can be a complex agreement that governs the exploitation of hydrocarbons C. Important JOA provisions among operators and non-operators,4 at the end of the day it is just another contract, and All JOAs will define, in some way, the Texas courts have noted that “[i]n operational area. In the AAPL Form 610 interpreting a joint operating agreement, we 5 apply principles of contract law.” Texas 2005, pet. denied). 6 St. Louis S.W. Ry. Co. of Tex. v. Griffin, 171 S.W. 2 Tawes v. Barnes, 340 S.W.3d 419, 426 (Tex. 2011) 703 (Tex. 1914) (“The citizen has the liberty of (quoting Seagull Energy E & P, Inc. v. Eland Energy, contract as a natural right which is beyond the power Inc., 207 S.W.3d 342, 344 n. 1 (Tex. 2006)). of the government to take from him.”). 3 Tawes v. Barnes, 340 S.W.3d at 426. 7 See, e.g. J.O. Young, Oil and Gas Operating 4 Professor Kuntz has noted “[t]he JOA is a carefully Agreements: Producers 88 Operating Agreements, structured instrument designed to govern a great Selected Problems and Suggested Solutions, 20 variety of operations over a long period of time.” 2 ROCKY MTN. MIN. L. INST. 197, 202 (1975). There EUGENE KUNTZ, A TREATISE ON THE LAW are model JOAs for coalbed methane fields, offshore OF OIL AND GAS 107 (1989). operations and international operations that may differ substantially from the AAPL Model Form 5 ExxonMobil Corp. v. Valence Operating Co., 174 610s. S.W.3d 303, 312 (Tex. App.—Houston [1st Dist.] P-1